Duty of Honest Performance of Contracts Recognized in Canadian Common Law

In a landmark decision, released on November 13, 2014,  (Bhasin v. Hrynew 2014 SCC 71), the Supreme Court of Canada recognized a new common law duty for parties to a contact to perform their contractual obligation honestly and in good faith, i.e. a duty of honest performance.   The recognition of this duty represents a change in the law in Canada. 

 

In this case, the plaintiff, Mr. Bhasin, operated a business in Alberta selling registered education savings plans on behalf of Canadian American Financial Corp.  (“Can-Am”).  After almost 10 years, Mr. Bhasin and Can-Am entered into a new agreement governing their relationship featuring a three year term which renewed automatically unless one party gave 6 months’ notice of termination. 

 

The defendant, Mr. Hrynew, a direct competitor of Mr. Bhasin, began working for Can-Am with a view to merging his business with Mr. Bhasin’s business.  Mr. Hrynew was placed in the position of “auditing” Mr. Bhasin’s business.  Can-Am repeatedly misled Mr. Bhasin about Mr. Hrynew’s duties and obligations as an “auditor” as well as the plan to merge Mr. Hrynew’s business with Mr. Bhasin’s.  Ultimately, Can-Am gave notice that it did not intend to renew Mr. Bhasin’s agreement resulting in the loss of value that Mr. Bhasin had built over a period of almost 10 years.  Mr. Bhasin’s sales force was subsequently assumed by Mr. Hrynew.

 

Mr. Bhasin sued Can-Am and Mr. Hrynew in the Alberta Superior Court alleging, among other things, that they had breached an implied duty of good faith.  His claim was successful at trial but was subsequently dismissed by the Alberta Court of Appeal. 

 

In a unanimous decision (the majority decision was written by Mr. Justice Thomas Cromwell), the Supreme Court of Canada held that the common law in Canada should take an incremental step forward to recognize a general doctrine in contract law that imposes a minimum standard of honest contractual performance.

 

The court recognized that Anglo-Canadian common law has resisted acknowledging any generalized, independent doctrine of good faith performance of contracts which is out of step with civil law of Quebec and most jurisdictions in the United States.  Rather, Canadian common law in that respect was piecemeal, unsettled, unclear and inconsistent with the reasonable expectations of commercial parties. 

 

Justice Cromwell identified the Court’s role to develop the common law to keep pace with the “dynamic and evolving fabric of Canadian society” where it can do so in an incremental fashion.  He contemplated not a wholesale change or a reversal of settled law, but a development directed at bringing greater certainty and coherence to the law.

 

The new doctrine of honest performance is characterized by two incremental steps:

 

1.  the first step is to acknowledge that good faith contractual performance is a general organizing principle of common law of contract which informs varies rules in various situations and types of relationships and recognizes obligations of good faith contractual obligations; and
2. the second step is to recognize as a further manifestation of this organizing principle that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

This new duty of honest performance is not an implied term but a general doctrine.  This means that the duty is operative irrespective of the intentions of the parties and is analogous to any other equitable doctrine such as unconscionability.   Justice Cromwell provided some guidance on how the new doctrine would manifest itself in the day to day performance of the commercial parties.  A general duty of honesty in contractual performance means simply that the parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.  This does not impose a duty of loyalty or of disclosure or require a party to put the other party’s economic interest ahead of its own.

This new principle has the potential to affect the manner in which commercial parties structure agreements, the way that parties to a contract exercise existing rights, negotiate for future rights and generally communicate with each other.

Regards,

Blair